Steel Authority of India - Below expectations: Lower volumes in a growing market; Goldman Sachs

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Steel Authority of India (SAIL.BO)
Neutral  Equity Research
Below expectations: Lower volumes in a growing market; Neutral
What surprised us
SAIL reported 4QFY11 net income of Rs15 bn (-28% yoy, +36% qoq), 18%
below our and 7% below Reuters consensus estimates. FY11 net income of
Rs48.8 bn came in 6% below our estimates. We believe the miss was driven
primarily by lower sales volumes which came in at 3.15 mn ton for the
quarter (12% below estimates). The company highlighted that market for flat
products was challenging in March, and this led to lower flat product sales,
driving inventory accretion which stood at 1.1 mn ton (+238 kT qoq) at the
end of March 2011. The company has now started offering volume discounts
and extended the interest free credit period for key bulk order customers to
liquidate the inventory. At the operating level, average realisations were inline and EBITDA/ton stood at US$165 (GSe: US$170). For FY11, SAIL reported
flat sales volumes of 11.7 mn ton and EBITDA/ton of US$138. The company
has stated that the brownfield expansion projects are due for completion
over the next 2 years, and has reported net debt of about US$60 mn with
planned capex of US$3 bn in FY12. The company is planning to raise capital
during FY12 through an FPO (Follow On Public Offering).      
What to do with the stock
We reduce FY11E-FY13E EPS by 6%-9% to account for higher than expected
operating costs post settlement of domestic coking coal price from Coal India
subsidiaries. We therefore lower our 12-m P/B-based TP to Rs178 (from
Rs181) on lower book value. The stock currently trades at 1.6X FY12E P/B
with 14% RoE and 8.2X EV/EBITDA. We maintain Neutral. Key risks: Delay in
project execution, lower costs.